January 25, 2014 Holy Biebs

Risk/Reward Vol. 205

THIS IS NOT INVESTMENT OR TAX ADVICE. IT IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.

"I'm in with the in-crowd/I go where the in-crowd goes
I'm in with the in-crowd/I know what the in-crowd knows."---lyrics from "The In-Crowd" sung by Dobie Gray

"Oh, no no, Oh no no/She's confident
Oh, no no, Oh no no/And I'm down with it."---lyrics from "Confident" sung by Justin Bieber

"How do we re-reverse the chemistry
I don't want us to be the end of me
This love is taking all my energy
Energy, my energy"---lyrics from "Energy" sung by Keri Hilson

As devotees of "House of Cards" know, in DC, journalists rely on being "in with the in-crowd"; "going where the in-crowd goes"; and "knowing what the in-crowd knows" or at least what the in-crowd wants them to know. And no one is more "in" with Ben Bernanke than Jon Hilsenrath of the Wall Street Journal. Thus on Tuesday, no one had to speculate as to the identity of his source when Hilsenrath reported on the front page of the WSJ that at its meeting on January 28th and 29th, the Federal Reserve likely will 1) taper (reduce) its asset purchases (a/k/a QE3) in February by another $10billion and 2) will give forward guidance that short term interest rates will stay at or near zero even if unemployment falls below 6.5%. It was clearly a trial balloon floated by Uncle Ben to ascertain the market's reaction. In the past, such stories caused the all important 10Year Treasury Bond to fall in price (which in turn caused its yield to rise). However this time the 10 Year actually rose in price, and correspondingly the yield dropped to its lowest point in six weeks. Clearly, Bernanke is now free to advocate this course of action in what will be his last meeting as Fed Chair. I, for one, hope he does. It is time to ween the markets from QE3, this week's MISERABLE market activity notwithstanding.

Indeed, the stability of the 10Year yield made fixed income investors "Confident" even in the face of an otherwise disappointing market. They are now "down with" the fact that the continued tapering of QE3 will not cause a precipitous rise in interest rates and that, unlike last year, they will not be crying "Oh no no/Oh no no" every time the word taper is mentioned. Once again take a look at all of the green numbers in the year-to-date column found on the closing table for preferred stock ( http://online.wsj.com/mdc/public/page/2_3024-Preferreds.html?mod=mdc_h_usshl#C ). The performance of these preferreds is representative of the ytd performance of fixed-income/interest-rate-sensitive securities generally. Indeed these securities (preferred stocks, business development companies, real estate investment trusts) held firm and some even rose as the Dow Jones Industrial Average (DJIA) suffered its worst week since November, 2011, losing 579 points on disappointing earnings reports, news of a possible economic slow down in China and anxiety over emerging markets.

Likewise, with the exception of drilling stocks, the large losses absorbed by the broader market this week were not felt in the "energy, my energy" sector. Another dose of the polar vortex is "taking all our energy", a fact demonstrated by a draw down of natural gas and propane reserves. This coupled with news that annual domestic consumption of oil rose in 2013 for the first time in several years and reports that the US may "re-reverse" its ban on exporting crude has caused many energy stocks to rise this year. My holdings in this sector include SDRL,SFL, HCLP, APU, ETP, KMP, KMR, FEI, TRN, VNR, VNRP, MHRpD, GRHpC, and GSTpA. But no stock in the energy patch has outperformed my largest holding in the sector, Linn Energy (LINE). Having been brutalized by short interest and the subject of rumors of accounting irregularities for much of last year, LINE now is hitting its stride. LINE is up over 9.5% in the past month and up over 20% in the past 90 days. With a dividend still in excess of 9% and the accretive impact of the Berry Petroleum acquistion yet to be felt, LINE could have more to gain. I for one, "don't want this to be the end" of LINE's run. I used Friday's massive downturn in drillling stocks to add to my position in SDRL.

Due to the makeup of my portfolio, I weathered this week's bloodletting better than most. No doubt, however, the 3.5% drop in the DJIA left many investors feeling about as secure as Justin Bieber's booking agent. That said, we must remain mindful that investing remains our greatest opportunity for financial independence. As the Bieb says, investing

"... can take you places you ain't never been before
Baby take a chance or you'll never ever know
I got money in my hands that I'd really like to blow
Swag swag swag, on you"